The Center of the California Enterprise Zone Information Universe

California Competes Credit Awardee May Withdraw

The Modesto Bee has a somewhat critical article about the recent California Competes announcement of credit awardees. The Bee seems to take issue with the fact that some past activity can be considered toward the business investments on which the credits are based. In addition, they interviewed two of the awardees and found that Duarte Nursery is considering withdrawing their application rather than be held to the conditions of the contract:

Big tax credits are being proposed for Modesto’s Flowers Baking Co. and Hughson’s Duarte Nursery. State officials say the corporate tax breaks would be in trade for those companies creating full-time jobs by expanding.

A government committee next week will consider approving $300,000 for Flowers to supposedly create 121 jobs and $250,000 for Duarte to create 33 jobs.

Unfortunately, most of those jobs won’t actually be new, and some of them may not materialize.

That’s because Flowers already has completed most of its expansion and hiring, and Duarte’s owners are considering withdrawing from the tax credit program because its requirements are too inflexible.

California Competes is a new business incentive program, and its rules are a bit confusing.

The Governor’s Office of Business and Economic Development is recommending that 31 companies be allocated $30 million in California Competes tax credits.

Besides the two Stanislaus County companies on that list, Inc. also is proposed to get tax credits for expanding its Tracy fulfillment center. How many new jobs it will get is not known.

At Flowers Baking, however, a proposed $300,000 in waived California corporate taxes would be in trade for the company spending “$25 million over the next five years” to expand its bakery production lines and increase its staff by 121 full-time employees.

Flowers opened its new $18 million bread-making line three months ago, but apparently that counts.

A year ago, the bakery employed only 70 people. Now, 221 have full-time jobs there. That’s an increase of 151. But just 65 of those workers were hired directly by Flowers. The remaining 86 are employed by an outsourcing firm called ABM.

“We did not know that we were going to get this credit before deciding to acquire the Modesto bakery assets. Our initial investment in Modesto occurred in July 2013, prior to the California Competes legislation,” explained Paul Holshouser, president of the Flowers facility in Modesto.

But Holshouser said his Georgia-based company “always considers state and local incentives when evaluating potential expansions.”

Besides the $18 million Flowers spent to expand, Holshouser said the tax credit agreement with the state “includes an estimate of additional expenditures made from now through 2018.”

He said the deal also anticipates job creation to reach the promised 121 new employees by 2015. Flowers offers assurance that those new jobs will pay employees a minimum of $35,000 per year.

All the mandated California Competes deadlines and requirements are making Duarte Nursery reconsider whether it wants to accept those tax credits this year.

“We may withdraw our application,” John Duarte said. “It’s a five-year commitment to expansion, and we don’t know whether we’re going to complete that many square feet of greenhouses in that time frame.”

The proposed deal would require Duarte to spend more than $33 million by 2018 “to construct approximately 1 million square feet of greenhouse space for the production of permanent crop trees and grapevines.”

The nursery spent nearly $15.6 million of that total in 2013, according to the tax credit agreement.

“The demand for trees and vines is very strong right now,” said Duarte, noting how his company expects to sell a record-breaking 3 million to 4 million almond trees this year. “We’ve scaled up a lot in the last few years, invested in new greenhouses … and added several hundred employees.”

But Duarte fears getting locked into more expansion by the tax credit deal. “We would rather expand based on market demand,” he explained.

When his company applied for California Competes credits, Duarte said he didn’t realize how limiting the requirements would be. “It’s not as flexible as the Enterprise Zone program used to be,” Duarte said. “I had hired hundreds of employees under that old program.”

The California Enterprise Zone Tax Credit was eliminated last July. California Competes, in part, replaced it.

Duarte said his nursery had used Enterprise Zone tax credits to make capital purchases and expand hiring over the years.

The Hughson nursery now covers nearly 200 acres, including 70 acres of greenhouses. It employs the full-time equivalent of about 743 people earning an average of $26,000 per year.

“We did the (California Competes) application and learned a lot about the process,” said Duarte, noting he is not sure his company will apply for those tax credits again. He said the new program does not use an objective selection process to decide which companies get picked for tax breaks. “A lack of transparency is never a good thing in government.”

Applications had to go through a competitive process to be selected, said Brook Taylor, a representative of the Governor’s Office of Business and Economic Development.

The selection criteria included the total jobs created, total investment, average wage, strategic importance and economic impact.

“This is the first time this program has ever been implemented,” Taylor said. California Competes’ rules, he said, allowed companies to qualify to get tax credits this year for expenditures made as far back as April 2013.

Thirty-one of the 396 companies that applied are being recommended for tax credits, and the final decision will be made June 19 by the California Competes Tax Credit Committee.

Among the biggest tax credits being recommended is more than $1.5 million for Amazon in trade for that company investing $225 million in California.

The Amazon deal would include expanding its fulfillment center in Tracy, building a new fulfillment center in Moreno Valley and establishing package-handling facilities in San Bernardino and Newark. Amazon would hire an additional 1,550 workers statewide, with those new full-time workers earning a minimum of $17,500 per year.

How many of those jobs would end up in Tracy is not specified in the proposed deal.

Follow maxshenker on Twitter

Receive By Email

Enter your email address and receive the EZ Policy Blog by email.